April 25 (Bloomberg) -- The Swiss National Bank will defend its franc ceiling to lessen the risk of deflation, President Thomas Jordan said.
“The environment remains extremely challenging for both the Swiss economy and our monetary policy,” Jordan said at the central bank’s annual general meeting in Bern today, according to a text of the speech distributed in advance. “With interest rates close to zero and a Swiss franc which is still high, the minimum exchange rate continues to be the SNB’s most important monetary policy instrument. An appreciation of the Swiss franc would entail a threat of deflation.”
The SNB, headquartered in Zurich, set a cap of 1.20 per euro on the franc in September 2011, citing the risk of deflation and a recession due to the Swiss currency’s rapid appreciation amid the euro area’s debt crisis. Jordan said he couldn’t exclude a worsening of financial market tension once again, repeating the assessment issued at the central bank’s monetary policy assessment last month.
“The global environment continues to present considerable uncertainties for Switzerland,” he said, confirming the SNB’s forecast for economic growth of 2 percent this year. “The danger has not been averted that the Swiss franc, as a safe haven, will suddenly become subject to further upward pressure.”
Political tensions in Ukraine renewed investors’ interest in the franc. The SNB last month cut its inflation forecast and now predicts stagnant consumer prices for this year.
While the SNB hasn’t had to intervene in currency markets to defend the franc since the autumn of 2012, the central bank remains “ready to enforce the minimum exchange rate, if necessary, by purchasing foreign currency in unlimited quantities, and to take further measures as required,” Jordan said.
The franc traded at 1.2190 per euro at 10:05 a.m. in Zurich, little changed from yesterday. Against the dollar it stood at 88.09 centimes.
Loose monetary policy rates has kept borrowing costs low, leading to a residential property market boom. To guard against mortgage writedowns, at the SNB’s suggestion the government has forced banks to hold more capital. That countercyclical buffer, which it doubled to 2 percent of mortgage-related assets in January, can be raised as high as 2.5 percent.
Real estate price momentum in the first quarter was similar to that of a year ago, Jordan said.
“However, to obtain an idea of the overall picture we are still lacking important data,” he said, adding it was still too early for a definitive assessment and that the SNB was examining whether the buffer needed to be raised further. “The authorities are also working on the specification of measures to target risks in the area of affordability.”
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